Jan
31
2025
Should I Buy a New or Used Car in 2021?

Should I Buy a New or Used Car? Pros and Cons

By | Budgeting & Goals, Financial Independence, money | Comments Off on Should I Buy a New or Used Car? Pros and Cons

If you’re wondering whether to get a new or used car in the year ahead, there isn’t one single answer. Each car shopper’s situation is likely to vary, and you need to make the decision that best suits your needs and your budget. Factors like the features you’re seeking in a car, price, insurance costs, and depreciation may come into play.

To help you decide where to spend your cash if you plan to buy some wheels, read on. You’ll learn the pros and cons of new and used cars, plus tips for making your choice.

Key Points

•   Choosing between a new or used car involves evaluating multiple factors like features, price, depreciation, and insurance.

•   New cars provide the latest features and warranties but depreciate quickly and are costly.

•   Used cars are more budget-friendly and depreciate more slowly, though they might have reliability issues.

•   The purchase decision often hinges on price and depreciation, with new cars losing value faster.

•   Personal preferences can dictate the better value; new cars for features and warranties, used cars for cost savings.

Pros and Cons of Buying a New Car

For some people, there’s nothing that can compete with the allure of a bright and shiny new car. However, it’s important to consider the pluses and minuses before making your purchase.

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Pros:

•   Pristine condition

•   Latest features

•   Warranty and service benefits

•   Multiple financing choices

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Cons:

•   Immediate depreciation

•   Higher price

•   Higher insurance costs

•   Limited ability to negotiate

Pros

•   Pristine condition: With a new car, you don’t have to kick as many tires. New vehicles arrive on dealer showroom floors (and at online auto sales platforms) in pristine condition with very few miles on the odometer, so you don’t have to spend time checking for vehicle inefficiencies and maintenance or repair issues.

•   Latest features: Some people may feel “the newer the car, the better.” Here’s why: The auto industry is doing wonders with new vehicle construction, with features like better gas mileage, longer ranges in the case of EV vehicles, and technological advancements that improve vehicle performance. Those upgrades come most notably in car safety, cleaner emissions, and digital dashboards that improve driving enjoyment.

•   Warranty and service benefits: New car owners are typically offered a manufacturer’s warranty when they buy a new car, which typically grades out better than third-party warranty coverage on a used car. Additionally, extended car warranties may be available, and auto dealers are more likely to offer services like free roadside assistance or free satellite radio to lock down a new car sale. Those services and features are harder to get with used vehicles.

•   Multiple financing choices: It’s often easier to get a good financing deal with a new car vs. a used car. That’s because the vehicle hasn’t been driven and should have no structural problems, maintenance, or repair issues. That’s important to auto loan financers, who place a premium on avoiding risk.

Next, learn about the potential downsides of buying a new car.

Cons

Some disadvantages of a new car purchase might sway a buyer’s decision.

•   Immediate depreciation: The moment you drive a new car off the dealer lot, it loses several thousand dollars in value, plus an estimated 20% in the first year of ownership and then 15% annually for the next few years afterward, which is not a fun fact when you are making car payments at the same level month after month.

•   Higher price: Saving up for a car is a big undertaking, and you may owe a lot of money on a new vehicle. The average price for a new car is $47,452 as of late 2024, which is a significant figure.

•   Higher insurance costs: Auto insurers typically deem new cars as being more valuable than used cars and assign auto insurance premiums accordingly. Also, since new cars cost more, auto insurers prefer to see new auto drivers get full coverage and not minimum coverage.

•   Less room to negotiate: New car models may be less negotiable in price than used ones. Because they are the latest shiny new thing, demand may be higher and inventory lower. A dealership may be less likely to knock down the price for this reason, while they might do so on a used car sitting on the same lot.

Recommended: 10 Personal Finance Basics

Pros and Cons of Buying a Used Car

Used cars offer buyers value and savings, which are attractive benefits to drivers who may not have a big budget, but still want to drive a quality vehicle. However, there are other benefits and downsides to consider as well.

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Pros:

•   Lower price

•   Slower depreciation rate

•   Your down payment may go further

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Cons:

•   Reliability issues

•   Fewer options

•   Maintenance costs

Pros

•   Lower price: No doubt about it, most used cars sell for significantly less than a new car with the same make and model. You learned above that the average new car is retailing for just under $50,000. How about used cars? The average is currently about $25,571, a considerable savings.

•   Slower depreciation rate: New cars tend to lose value quickly, as noted above, especially if they’re not properly cared for. But used cars tend to depreciate more slowly, especially if they’ve had regular maintenance, and their sustained value makes them a good resale candidate if the owner wants another vehicle, but still wants to make a good deal when selling the vehicle.

•   Your down payment may go farther: Buyers who can manage a robust down payment on a used vehicle can bypass a good chunk of the debt incurred in purchasing the vehicle. It comes down to simple math — if a buyer purchases a $25,000 used vehicle with a down payment of $15,000, there’s only $10,000 left to pay on the vehicle. If a buyer purchases a new vehicle for $48,000, and puts $15,000 down, that buyer still owes $33,000 on the auto loan. Buying a used car could leave more money in your budget to put in a high-yield savings account for emergencies or another purpose.

Cons

When deciding whether to buy a used car or not, these potential disadvantages may also be worth considering.

•   Reliability issues: With a used car, an owner may be getting a quality vehicle — or maybe not. A used car may have spent years on the roads and highways, incurring a fair share of dings, dents, and general wear and tear that may have aged it prematurely, particularly if it hasn’t been maintained well.

•   Fewer options: You may not get the exact make and model you want. The options can dwindle when it comes to buying a used car. Whereas auto dealers can offer a wide range of makes, models, and colors for a new vehicle, those choices can be significantly limited with a used car, truck, or SUV. That could mean that a used vehicle buyer may have to compromise on different factors, in contrast to someone who is buying new and can often get their dream car, down to the last detail.

•   Maintenance costs: You may pay more for vehicle maintenance. Auto repairs often cost more over time and become more frequent, too, as a car ages. So you may well pay more for maintenance and repairs with a used car. With a very old car, finding parts to complete repairs may also be a challenge. In other words, it may take more time and have you spending more from your checking account to keep the car running.

Is It a Better Value to Buy a New or Used Car?

As noted above, there’s no one-size-fits-all answer to whether a new or used car is the better value, but often, a used car is considered a better value. This is because, with a used car, depreciation has already occurred, meaning the price is lower. In this way, you may be able to get more car for the money you’ve earmarked for this purchase, and the car could have a better resale value. Insurance costs may be lower as well.

Is It Easier to Get Approved for a New or Used Car?

In general, it’s considered easier to get approved for a new car loan vs. one for a used car. That’s because new cars are thought to be less risky since they are new, without wear and tear issues. Their value is thought to be simpler to determine.

It’s worthwhile to consider how your credit score could impact which loan offers you might qualify for:

•   If you have very good or excellent credit (say, 781 or above), your interest rate as of late 2024 would typically be close to 5.08% APR (annual percentage rate) for a new car or 7.41% APR for a used car.

•   If you have good to very good credit (between 661 and 780), your APR for a new car would be close to 6.70% APR and 9.63% APR for a used car.

•   If you have a credit score that’s in the fair range to lower good range (between 601 and 660), you’d likely be assessed an APR of close 9.73% APR for a new car and a 14.07% APR for a used car.

•   If your credit score was between 501 and 600 (in the lower section of the fair range), you may have a more difficult time accessing financing and could expect to be charged close to 13.00% APR for a new car and 18.95% APR for a used car.

•   Have a lower score, in the 300 to 500 range (poor)? You might expect to face challenges getting financing. Those who do offer you a loan could charge close to 15.43% APR for a new car and 21.55% APR for a used car.

Consider Buying a New Car If…

As you make your decision between buying a new or used car, you likely will have your own set of needs and preferences. Here’s when buying new may be your best option:

•   If you can afford what is likely to be the higher price tag of buying a new car and loftier insurance costs (as noted above), then you may want to go ahead and buy the latest model.

•   You want the latest bells and whistles: If you feel you need an auto with certain new features (whether it’s the design or a safety system), then you may opt for this year’s model.

•   If you are financing your purchase, you may be able to get a more favorable APR when buying a new vs. used vehicle. Doing research on how to get a car loan can help you prepare for this path.

Consider Buying a Used Car If…

For some people, though, buying used can be the wiser choice. For instance:

•   If you have a fixed budget, a used car will generally offer a lower price and possibly lower insurance costs, too.

•   Is there a feature you need but can’t afford in a brand new car? A used car may suit your needs. For instance, if you really need a vehicle with a third row of seats but can’t afford one brand new, that may lead you to a used car.

•   If you want to avoid the steep depreciation that comes with buying a new car, a used car may work better for you. It may help to know your car will retain much of its purchase price in the coming years. This could be helpful if, say, you know you’ll be selling the car in a year or two and want to forecast how much you’ll net to put in an online bank account.

By weighing your choices on these fronts, you will likely be able to make the right move, both in terms of the car you buy and how well it fits into the type of budget you use.

As you would with any major purchase decision, you’ll want to shop around, check the book value of preferred vehicles, and look at the car’s maintenance and repair history to ensure it’s in good condition. You may also want to make sure it’s inspected by a trusted mechanic.

Recommended: How to Automate Your Finances

The Takeaway

The choice between a new and used car likely will depend upon your personal preferences and financial situation. New cars may have the latest features and lower maintenance and financing costs, but they tend to be pricier and trigger higher insurance costs. And they will depreciate rapidly. A used car will usually have a lower sticker price but maintenance costs and higher rates on financing should be noted.

As you think about car financing that best suits your needs, you may want to make sure that your banking partner is the right one, too, and is helping your money work harder for you.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Do used cars require more maintenance vs. new cars?

You may pay more for maintenance on a used car vs. a new one. Typically, older cars need more work than their younger counterparts.

Are used cars a better deal than new cars?

Used cars can be more affordable than new ones, from the sticker price to the insurance costs, and because they don’t depreciate as rapidly as new cars, they can be a better deal.

What are options to buying a new or used car?

Buying a certified pre-owned car, which has been vetted to be in very good condition, or leasing a car are other options you might consider when thinking about buying a new or used car.

Photo credit: iStock/Ivanko_Brnjakovic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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Jan
28
2025
What Is a Credit Card? Find Out All You Need to Know

Credit Card Definition and Explanation

By | Credit | Comments Off on Credit Card Definition and Explanation

A credit card is a small, rectangular piece of plastic or metal that lets you make purchases. Whether you’re buying lunch or a new piece of furniture, a credit card enables you to borrow funds from a credit issuer to pay the merchant. Then, every month, you’ll receive a statement in the mail with your balance, which you’ll want to pay off every billing cycle. Otherwise, you’ll owe interest on the remaining amount.

While the concept sounds simple, it’s easy to rack up debt if you’re not careful. With that in mind, here’s credit cards explained in-depth.

Key Points

•   Credit cards enable purchases and borrowing against a credit limit, with interest accruing on unpaid balances.

•   High interest rates can lead to significant debt if only minimum payments are made.

•   Debit cards deduct funds directly from accounts, while credit cards offer credit and potential rewards.

•   Various credit card types include reward, credit builder, balance transfer, secured, travel, and 0% introductory APR cards.

•   Responsible usage, such as paying in full and on time, can help avoid debt and build credit scores.

Credit Card Meaning

Banks and other financial institutions issue credit cards to consumers to extend revolving lines of credit. A revolving line of credit means the cardholder can borrow money up to their credit limit and then repay it on a continuing basis.

With other lines of credit, like a personal loan, you take out a lump sum amount and agree to repay it within a specific timeframe. During this timeframe, you make fixed installment payments. On the other hand, with a credit card, you can repeatedly borrow against the limit, which gives you more flexibility to use the card as needed.

When you receive your credit card, you’ll note several different numbers on it. There’s the credit card account number, alongside your name and the credit card issuer’s logo. Also on a credit card are the credit card expiration date, which marks when the card is valid through, and the CVV number on a credit card, which offers an extra layer of security in purchases made online or over the phone.

Recommended: What Is a Credit Card CVV Number?

How Does a Credit Card Work?

While there are different types of credit cards, this is the basic way they work. Once you have a new credit card in hand, you can use it to make purchases at places that accept credit card payments. Then, every month, you’ll receive a statement either electronically or in the mail, depending on your preference. The statement will include all purchases, your outstanding balance, and the minimum monthly payment due.

You’re required to make at least the minimum payment on your account to keep it open and in good standing. However, you also can opt to pay your entire balance in full or decide on another amount (as long as it meets the minimum payment requirement). If you were to pay an amount that exceeds your total balance, then you’d end up with a negative balance on your credit card.

If you aren’t able to make the minimum credit card payment, the outstanding balance will roll over to the next month and begin accruing interest and fees — which can significantly add up over time. Therefore, it’s best to get in the habit of paying off your credit card every month to avoid paying an extremely high amount of interest. But, if your finances don’t allow you to pay the entire balance, you could make smaller payments throughout the month to minimize the amount of accumulating interest.

To ensure you make your monthly payments, you can usually set up autopay for the minimum payment. This way, you won’t miss a payment and get charged a late fee. Unfortunately, late payments also can end up on your credit report, which can negatively affect your credit score.

How Does Credit Card Interest Work?

Every credit card comes with an annual percentage rate (APR), which represents the annualized cost of borrowing including interest and fees and marks an important part of how credit cards work. In general, credit cards are considered to have high interest rates vs. some other forms of credit, such as personal loans.

Some credit cards have more than one APR, such as a balance transfer APR, an introductory APR, or a cash advance APR. While introductory APRs are usually lower than the standard rate but only last for a promotional period, cash advance APRs are typically higher than the standard purchase APR.

You will pay interest based on the APR on a credit card if you have an outstanding balance that carries over from one month to the next. Credit issuers use your average daily balance, interest rate, and the number of days in the billing cycle to calculate the interest amount.

Usually, credit issuers offer a grace period where interest will not accrue. This period is typically between the statement date and due date, commonly 21 days.

Credit vs. Debit Cards

They may look alike, but there are notable and important differences between credit cards and debit cards. For starters, you’re not borrowing funds with a debit card. Instead, you’re drawing on funds in the bank account attached to the debit card. As such, you can’t incur interest charges, nor can you rack up debt. However, you can’t use a debit card to help establish your credit.

In general, debit cards offer less robust consumer protections against financial fraud and theft than credit cards do. They also don’t typically offer rewards or other benefits that credit cards can have.

6 Common Types of Credit Cards

Now that you understand how credit cards work, here are some available credit card options.

1. Reward Cards

You can earn cash back, points, or miles when you spend money using a rewards credit card. Some credit cards may also offer a sign-up bonus. For example, a credit card could offer 100,000 points when you spend $4,000 or more within the first three months of enrolling.

You can usually find a card offering rewards that coincides with your spending habits. For example, if you love shopping at a particular store, retail-branded cards have lucrative benefits for frequent shoppers.Some programs, like SoFi Plus, provide exclusive benefits that go beyond standard rewards, offering additional perks for members who qualify.

Keep in mind that you typically have to have a good credit score to qualify for a rewards credit card. But, even if you do qualify, it’s essential to keep your spending habits in check. Reward cards incentivize you to spend money, so you don’t want to end up overspending and getting into a pile of debt you can’t climb out of.

2. Credit Builder Cards

If you have little to no credit or need to build your credit, a credit builder credit card is a viable solution. You’ll likely start with a lower credit card limit and an APR that’s higher than the average credit card interest rate to reduce the credit card issuer’s risk.

Credit builder credit cards usually don’t come with the bells and whistles that rewards cards offer. Instead, the card can help you build your credit. With that said, you’ll want to use your credit card responsibly, making on-time monthly payments and paying off your balance every month. Not doing so could negatively impact your credit history and cost you a lot of money.

3. Balance Transfer Cards

Do you have a high-interest outstanding credit card balance? Using a balance transfer credit card is one solution for helping you tackle your debt. Balance transfer credit cards let you move your current credit card debt to a new account with a lower interest rate. Additionally, transferring your balance can mean you’ll only have to stay on top of one payment a month, rather than multiple.

Having a good credit score can help you qualify for a balance transfer credit card. If you qualify, you could receive a lower ongoing rate or even a 0% introductory rate, which usually will last for six to 18 months. You’ll want to try to pay off your balance within that promotional period, before the higher APR kicks in.

Note that balance credit cards often charge a fee for transferring a balance — usually 3% or so of the amount transferred. So, make sure you factor in the additional fees before you move over your existing balance.

4. Secured Credit Cards

Another option for those with little to no credit or poor credit history is a secured credit card. With a secured credit card, you make a refundable deposit, which protects the card issuer from defaulted payments. If you default, the credit card issuer can use the deposit to recoup the loss.

Your deposit is usually the amount of your credit limit. For example, if you are approved for a $500 limit, you may need to put down $500. Though your deposit will be tied up while the account is open, a secured credit card can allow you to build your credit when used responsibly. Just keep in mind that while secured credit cards are generally easier to qualify for, they also tend to have higher APRs and fees.

If you decide to close a secured credit card account, you can usually get your deposit back. The card issuer may also give you the option to upgrade to an unsecured card if you’ve proven your creditworthiness. In this case, you’d receive a refund as well.

5. Travel Credit Cards

If you’re a frequent flier or visit hotels often, a travel credit card can be a lucrative choice. Many airline and hotel brands have credit cards that let you earn miles, points, or rewards to use toward your travel adventures. Some credit cards may also come with a sign-up bonus or extra perks such as free checked bags, access to VIP airport lounges, and travel insurance.

When selecting a card, you’ll want to find the card that makes sense for the way you travel. That way, you can get the most out of your credit card. Travel credit cards usually require applicants to have good to excellent credit for approval. So, before applying, make sure to check your credit score to see if it’s acceptable.

6. 0% Introductory APR Credit Cards

If you’re getting ready to make a big purchase, a 0% introductory APR credit card might be worth considering. With this type of credit card, the card issuer gives you a 0% introductory rate to make purchases during a specific time frame. This way, you can make the purchase without paying interest on the expensive item(s).

However, you’ll want to make sure you repay the entire amount before the introductory period ends to avoid interest. Before you swipe, make sure you have a plan to pay off the balance within that time frame.

Also note that to qualify for a 0% introductory APR credit card, you usually must have good to excellent credit.

Pros and Cons of Credit Cards

Here’s an overview of the pros and cons of credit cards, which are helpful for anyone just getting familiar with the credit card definition to be aware of:

Pros of Credit Cards Cons of Credit Cards
Convenient, trackable method of payment Possible to rack up debt
Can help to build credit Potential to negatively impact credit
Provides fraud protection and may offer rewards Interest
Allows you to pay over time Fees

Pros

Reasons a credit card can be worthwhile include:

•   Convenience. A credit card offers much greater convenience than, say, carrying around a wad of cash. You can easily swipe or tap your card at any merchant that accepts credit card payments, which the vast majority do.

•   Pay over time. Another benefit of a credit card is that it allows you to pay over time for a purchase. Say you’re in an emergency and need to access funds immediately, but know you’ll be good to pay back the amount soon. Or maybe you’re making a big purchase and don’t want to have to shell out for it all at once, instead spreading out payments throughout the month.

•   Build positive credit history. Credit cards give you the means to establish a strong payment history, which can help boost your credit score. When you need to apply for a personal loan or mortgage in the future, a higher credit score can help you qualify for better terms and rates.

•   Track spending. Credit cards are valuable tools for budgeting since many cards let you track your spending on an app or online. Also, some credit cards give you the ability to categorize your expenses to see where your money is going and make adjustments accordingly.

•   Get fraud protection. If your debit card information is stolen, fraudsters can directly access your bank account. But, if you use a credit card, you usually have more fraud protection benefits in places such as purchase protection and identity theft protection. For instance, you can dispute a credit card charge and even receive a credit card chargeback.

•   Earn rewards. Many credit cards offer a reward program like SoFi Plus that gives you points or cash back when spending money. For example, you could earn money for traveling, shopping, or even statement credits.

Cons

Remember, while credit cards are a valuable financial tool, they can also hinder you if not used responsibly. Here are some downsides to keep in mind:

•   Potential to damage credit. Just as you can positively impact your score with a credit card, you can also negatively affect it.

•   Possible to rack up debt. Credit cards can make it easy to rack up a mountain of debt that can continue ballooning, thanks to interest. It’s not easy to get rid of credit card debt either (for instance, here’s what happens to credit card debt when you die).

•   Interest. Credit cards generally have higher APRs compared to other types of debt — usually well into the double digits. It can make purchases much more expensive if you’re paying a hefty amount of interest on top of the actual cost.

•   Fees. Another downside of credit cards is the potential to incur fees. Some are avoidable, like late fees or cash advance fees, while others can be harder to avoid, such as if your credit card of choice charges an annual fee.

How to Apply for a Credit Card

Before you apply for a new credit card, you’ll want to check your credit score. You can pull a free copy of your credit report at AnnualCreditReport.com. Knowing your credit score will help you determine whether you meet the approval requirements for the cards you’re interested in.

Once you decide on some card options, you can usually get prequalified online. If you prequalify for a card, your approval odds could be in your favor (though you’re still not actually approved). Also, when companies process your preapproval, they only complete a soft credit inquiry, which won’t impact your credit like a hard inquiry does. However, when you’re ready to apply, the credit issuer will conduct a hard credit inquiry.

If you’re approved for the card you apply for, you should receive your credit card in the mail within 14 days.

The Takeaway

A credit card, in simplest terms, is a physical card you can use to make purchases and pay bills. A credit card typically comes with a credit limit, and you’ll receive a statement each month that details your purchases, the outstanding balance, and the minimum payment due. You’re required to pay the minimum amount due each month in order to remain in good standing with the credit card issuer and avoid negatively impacting your credit score. Paying off your balance in full each month enables you to avoid interest charges.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What are the main differences between credit and debit cards?

Debit cards use the money in your checking account to pay for purchases. When you make a purchase using a credit card, on the other hand, you’re using a line of credit to borrow money. Therefore, you usually have to pay interest on your transactions with a credit card if you don’t repay your balance right away.

How do I choose a credit card?

It’s helpful to select a credit card that matches your needs and financial habits. You’ll also want to make sure you meet the card issuer’s approval criteria. For example, if a credit card requires a credit score of 700 and your score is 650, you may have to explore other options or take steps to build your credit before applying.

How long does it take to get a credit card?

Once you submit a credit card application, it may take just minutes before you’re approved. Usually, you’ll receive your credit card within 14 days of approval. You can call the credit issuer and request expedited processing if you need your credit card sooner.

Photo credit: iStock/Nodar Chernishev

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Jan
27
2025
Solo 401(k): The Retirement Plan Built for the Self-Employed

Navigating Solo 401(k) Plans: A Complete Guide for the Self-Employed

By | invest, Investing, Preparing for Retirement | Comments Off on Navigating Solo 401(k) Plans: A Complete Guide for the Self-Employed

Being self-employed offers many perks, including freedom and flexibility. What it doesn’t offer is an employer-sponsored retirement plan. But when you don’t have access to a 401(k) at work, opening a solo 401(k) can make it easier to stay on track with retirement planning.

Before you establish a solo 401(k) for yourself, it’s important to understand how these plans work and the pros and cons involved.

What Is a Solo 401(k)?

A solo 401(k) is a type of 401(k) that’s designed specifically with self-employed individuals in mind. This retirement savings option follows many of the same rules as workplace 401(k) plans in terms of annual contribution limits, tax treatment, and withdrawals. But it’s tailored to individuals who run a business solo or only employ their spouses.

It’s one of several self-employed retirement options you might consider when planning a long-term financial strategy.

Definition and Overview

A solo 401(k) is a tax-advantaged retirement account that’s for self-employed individuals and business owners who have zero employees, or no employees other than their spouse. This type of 401(k) plan is also known by a few other names:

•   Solo-k

•   Uni-k

•   One-participant plan

Traditional solo 401(k) contributions are made using pre-tax dollars. However, it’s possible to open a Roth solo 401(k) instead. In the case of a Roth solo 401(k), you’d make contributions using after-tax dollars and be able to withdraw the money tax-free in retirement.

A self-employed 401(k) plan works much the same as a regular 401(k). For instance, you may be able to take loans from your savings if needed. Catch-up contributions are also allowed. The biggest difference is that there is no matching contribution from an outside employer.

You can start investing in a solo 401(k) for yourself through an online brokerage. There’s some paperwork you’ll need to fill out to get the process started, but once your account is open you can make contributions year-round.

At the end of the year, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if the account has $250,000 or more in assets.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Contribution Limits in Solo 401(k) Plans

Much like workplace 401(k)s, there are annual contribution limits that apply to solo 401(k) plans.

The IRS caps total contributions to a solo 401(k) account at $69,000 for 2024 and $70,000 for 2025. That doesn’t include catch-up contributions for those age 50 and over.

As both the employee and employer of your own business, you can contribute both elective salary deferrals and employer nonelective contributions (you are both the employer and the employee in this scenario). Each has different contribution caps.

Annual Contribution Limits

As an employee, you can contribute up to 100% of your earned income up to the annual contribution limit: $23,000 in 2024 and $23,500 in 2025, plus an additional $7,500 for those age 50+ in elective salary deferrals. In 2025, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500.

In addition, you can make employer nonelective contributions. These come directly from the “employer” (aka you) and are not deducted from the employee’s (your) salary. As an employer, you can contribute up to 25% of your self-employment income (business income – ½ self-employment tax and elective salary deferrals), in pre-tax dollars.

Setting Up a Solo 401(k) Plan

If you’re interested in setting up a solo 401(k) for yourself, you can do so through an online brokerage. Here’s a step-by-step guide for how to open a solo 401(k).

Steps to Establish Your Plan

1. Choose a Plan Administrator

A plan administrator is the person responsible for managing your solo 401(k). It’s their job to make sure the plan is meeting reporting and other requirements established by the IRS. If you’re self-employed, you can act as your own plan administrator or you could choose your accountant instead.

2. Choose a Brokerage

Once you know who’s going to manage the plan, the next step is deciding where to open it. A number of brokerages offer solo 401(k) plans so you may want to spend some time comparing things like:

•   Account setup process

•   Investment options

•   Fees

You may be able to start the solo 401(k) account setup process online, though some brokerages require you to call and speak to a representative first. And you may need to finalize your account opening by mailing or faxing in any supporting documents the brokerage needs to complete the application.

3. Fill Out a Solo 401(k) Application

Before you can start a 401(k) account for yourself, you’ll need to give your brokerage some information about your business. A typical solo 401(k) application may ask for your:

•   First and last name

•   Employer Identification Number (EIN)

•   Plan administrator’s name and contact information

•   Social Security number

•   Mailing address

•   Citizenship status

•   Income information

You’ll also need to disclose any professional associations or affiliations that might result in a conflict of interest with the brokerage. In completing the application, you’ll be asked to name one or more beneficiaries. You may also be asked to provide bank account information that will be used to make your initial contribution to the plan.

4. Choose Your Investments

Once you’ve returned your solo 401(k) account application and it’s been approved, you can choose your investments. The type of investments offered can depend on the brokerage and the plan. But typically, you may be able to choose from:

•   Target-date funds

•   Index funds

•   Actively managed funds

•   Exchange-traded funds (ETFs)

Whether you have access to individual stocks, bonds, CDs, or alternative investments such as commodities can depend on the platform that’s offering the plan.

5. Decide How Much to Contribute

You may choose to schedule automatic investments or make them manually according to a schedule that works for you.

Choosing Between Traditional and Roth Solo 401(k)s

You can opt for a traditional solo 401(k), which is made with pre-tax dollars, or a Roth solo 401(k), which is made with after-tax dollars. Which plan is better for you may depend on what you expect your income to be in retirement.

If you believe your income will be higher in retirement than it is now, in general, a Roth could be a better choice since you can take the distributions tax-free at that time. But if you think your income may be less in retirement than it is now, you might be better off with a traditional solo 401(k), which allows you to take the tax deduction now and have your distributions taxed in retirement.

Advantages and Disadvantages of Solo 401(k) Plans

When considering retirement account options, it can be helpful to look at the pros and cons to determine what works best for your personal situation.

Benefits of Having a Solo 401(k)

There are different reasons why opening a 401(k) for self employed individuals could make sense.

•   Bigger contributions. Compared to other types of self-employed retirement plans, such as a SEP IRA or SIMPLE IRA, solo 401(k) contribution limits tend to be more generous. Neither a SEP IRA or SIMPLE IRA, for instance, allows for catch-up contributions.

•   Roth contributions. You also have the option to open a Roth solo 401(k). If you anticipate being in a higher tax bracket when you retire, you may prefer being able to withdraw contributions tax-free with a Roth.

•   Flexible withdrawal rules. A solo 401(k) can also offer more flexibility with regard to early withdrawals than a SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. If your solo 401(k) plan allows it, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. An IRA-based plan wouldn’t allow for loans.

Considerations and Potential Drawbacks

There are also a few potential downsides of investing in a solo 401(k).

•   Eligibility restrictions. If you run a small business and you have at least one employee other than a spouse, you won’t be able to open a solo 401(k) at all.

•   Complicated reporting. Calculating contributions and filing can be more complicated with a solo 401(k) vs. a SEP IRA or SIMPLE IRA. If your plan has more than $250,000 in assets you’ll need to file Form 5500-EZ with the IRS each year.

•   Administrative costs. Depending on where you open a solo 401(k) plan, the cost of maintaining it year to year may be higher compared to other self employed retirement plans. And an early 401(k) withdrawal can trigger taxes and penalties.

It’s important to consider the range of investment options offered through a solo 401(k). What you can invest in at one brokerage may be very different from another. The individual cost of those investments can also vary if some mutual funds or exchange-traded funds offered come with higher expense ratios than others.


💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Withdrawals and Loan Provisions

There are certain requirements for withdrawals and/or loans from a solo 401(k).

Rules for Withdrawing Funds

You can make withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability, but you may owe a 10% penalty as well as income taxes on the withdrawal.

Loan Options and Conditions

Some solo 401(k) plans may be set up to allow loans. If yours does, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. Just be sure to find out the loan terms and conditions, which can vary by plan.

Testing and Compliance for Solo 401(k)s

Unlike workplace 401(k)s, solo 401(k)s have no testing compliance requirements involved.

Alternatives to Solo 401(k) Plans

Instead of a solo 401(k), self employed individuals can consider another type of retirement account. Here’s how different options stack up.

Comparing a Solo 401(k) to a SEP IRA and Other Retirement Options

A SEP IRA is designed for small businesses. However, unlike a solo 401(k), a SEP IRA allows no catch-up contributions and there is no Roth version of the plan.

A SIMPLE IRA is for businesses with no more than 100 employees. It has much lower contribution limits than a solo 401(k) and once again, there is no Roth option.

Pros and Cons of a Solo 401(k)

A solo 401(k) has advantages and disadvantages. Here’s a side-by-side comparison of the benefits and drawbacks.

Solo 401(k) Pros

 Solo 401(k) Cons
Catch-up contributions may allow older investors to save more for retirement versus a SEP IRA or SIMPLE IRA. Only self-employed individuals who have no employees or just employee their spouses can contribute.
It’s possible to choose between a traditional solo 401(k) or Roth solo 401(k), based on your investing goals and tax situation. Annual reporting requirements may be more complicated for a solo 401(k) compared to other self employed retirement plans.
Solo 401(k) plans may allow for loans, similar to workplace plans. Early withdrawals from a solo 401(k) are subject to taxes and penalties.

The Takeaway

A solo 401(k) can be a worthwhile investment vehicle for self-employed people who want to save for retirement. It has more generous contribution limits than some other retirement options. In addition, there is a Roth version of the plan, and a solo 401(k) plan may also offer flexibility in terms of early withdrawals. For individuals who are self-employed, opening a solo 401(k) is one potential way to start saving for their golden years.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can I contribute 100% of my salary to a solo 401(k)?

As an employee, you can contribute up to 100% of your earned income to a solo 401(k) up to the annual contribution limit, which is $23,000 in 2024, and $23,500 in 2025, plus an additional $7,500 for those age 50 and up in elective salary deferrals. For 2025, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500.

Is a solo 401(k) taxable income?

You will pay taxes with a solo 401(k), but the type of plan you open determines when you’ll pay those taxes. If you have a traditional 401(k), your contributions are tax-deferred, and they reduce your taxable income for the year in which you make them. However, you will pay taxes on distributions when you take them in retirement. If you have a Roth 401(k), you pay taxes on your contributions when you make them, but your distributions in retirement are tax-free.

What is the average return on a solo 401(k)?

The return on a solo 401(k) depends on the investments in your portfolio. However, in general, a solo 401(k) invested in a mix of bonds, stocks, and cash assets can have an average rate of return ranging between 3% and 8%. But again, it depends on what your investments are, and how much you allocate to those different assets. You may want to compare your plan’s performance to plans with similar funds to get a general sense of what the average return might be.

Who qualifies for a solo 401(k)?

To be eligible for a solo 401(k), you must be self-employed or a small business owner with no employees other than a spouse. To open a solo 401(k) you will need an Employee Identification Number (EIN), which is available from the IRS.

Photo credit: iStock/visualspace

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®

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Jan
24
2025
What Is an Itemized Deduction?

Guide to Itemized Deductions

By | Budgeting & Goals, Family Finances, money | Comments Off on Guide to Itemized Deductions

Tax deductions enable taxpayers to reduce their total taxable income. That can be a very good thing: It can result in a lower tax bill or, if you had too much withheld through the year, a larger refund.

While most people now take the standard deduction — especially since the Tax Cuts and Jobs Act of 2017 effectively doubled the standard deduction amount — some taxpayers may benefit from itemizing their deductions.

Doing so can be a somewhat complicated and time-consuming process, but it may save you money. Here’s your guide to itemizing deductions; read on to learn:

•  What is an itemized deduction?

•  How do itemized deductions differ from standard deductions?

•  What are examples of itemized deductions?

•  What are the pros and cons of itemizing deductions?

What Is an Itemized Deduction?

Itemized deductions are a strategy to lower your adjusted gross income for a tax year. Rather than taking a set standard deduction whose amount is determined by the Internal Revenue Service (IRS), some taxpayers choose to calculate all deductions for which they’re eligible. They can then decrease their taxable income by that amount.

It’s worthwhile for some taxpayers to do the math and see how much they can reduce their tax bill by itemizing. That said, many may realize they can actually reduce their taxable income more by taking the standard deduction. Why? The standard deduction is much larger than it used to be since the passing of the Tax Cuts and Jobs Act at the end of 2017.

For the 2024 tax year (filing in 2025), the standard deduction is:

•  $14,600 for single tax filers ($15,000 for tax year 2025)

•  $21,900 for heads of household ($22,500 for tax year 2025)

•  $29,200 for married couples filing jointly ($30,000 for tax year 2025)

Almost everyone can take the standard deduction — and there’s a lot less math and paperwork involved. But for a unique set of taxpayers, itemized deductions could yield an even larger tax liability reduction than what the IRS offers through the standard deduction.

Itemized vs. Standard Deduction: What’s the Difference?

So what are the differences between itemized deductions and the standard deduction? Let’s take a look.

•  Dollar amount: The standard deduction is a set amount. If you choose the standard deduction, you cannot reduce your tax liability further by tacking on itemized deductions. When itemizing, the amount by which you reduce your tax burden varies depending on your unique tax situation. In nearly every case, it only makes sense to itemize if the resulting deduction is larger than the standard deduction or if you aren’t eligible to take the standard deduction.

•  Process: Claiming the standard deduction is straightforward. You don’t need to produce receipts and sort through expenses. If you itemize, you’ll need to educate yourself about all the deductions for which you qualify, produce the proof that you qualify in case of a tax audit, and fill out what is known as Schedule A on your tax return.

•  Eligibility: Anyone can itemize their deductions, but the standard deduction has a few exceptions. For example, if you’re married but filing separately and your spouse itemizes, you must itemize as well. While almost everyone is eligible to take the standard deduction, it never hurts to check with the IRS or your accountant to ensure eligibility.

Recommended: How to Pay Less Taxes: 9 Simple Steps

How Do Itemized Deductions Work?

Now that you know what itemized deductions vs. standard ones are, consider a more specific example of how they work.

Itemized deductions reduce your overall tax liability, just like the standard deduction. The catch? You can only take the itemized deductions for which you’re eligible. If you can cobble together enough itemized deductions to equal a larger tax-liability reduction than the standard amount, it could be worth itemizing.

As an example, let’s assume your gross income was $100,000.

•  The standard deduction for this income for tax year 2024 is $14,600 for single filers, so your taxable income would be $85,400.

•  Let’s suppose your itemized deductions are worth $20,000. It will lower your taxable income to $80,000.

Because your itemized deductions are greater than the standard deduction, it makes sense to itemize. Doing so will lower your taxable income and can thereby reduce the taxes you pay.

While it may take longer to calculate your deductions and prepare your tax return, it may make good financial sense to keep that extra cash in your pocket (or savings account, as the case may be).

Types of Itemized Deductions

The IRS offers an extensive list of potential itemized tax deductions, but you’ll probably only qualify for a handful. Here are a few of the most common:

•  Property tax deduction

•  Mortgage interest deduction

•  Charitable contribution deduction

•  Deduction of state and local sales taxes

•  Deduction of certain medical and dental expenses

While the IRS used to have a long list of miscellaneous deductions — from moving expenses to unreimbursed job expenses to tax preparation fees — many of these disappeared with the Tax Cuts and Jobs Act.

Independent contractors may want to consider itemizing; check out the tax deductions for freelancers to see which ones you may qualify for. As you itemize your business expenses, pay attention to the home office tax deduction, as well as how much you spend on office supplies, travel, and other business-related expenses. Make sure to keep good documentation of what you’ve paid.

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How to Claim an Itemized Deduction

To claim itemized tax deductions on your return, you’ll need to fill out IRS Schedule A with your Form 1040. Here’s what that process looks like:

1.   Research itemized deductions. It’s helpful to know which deductions you qualify for — and to gather up necessary documentation to enter in all the information beforehand. Preparing for tax season can make the process go much more smoothly!

2.   Fill out Schedule A. You’ll enter in all your expenses and add them up to get your total deduction.

3.   Compare it to the standard deduction. Before copying that total over to your Form 1040, it’s wise to reference the standard deduction for your filing status this year. Once you’re sure that the itemized deduction can yield larger savings, you can write down the number on Form 1040 and continue filing your taxes.

While the process sounds straightforward, it can be difficult to find out which deductions you’re eligible for and how to tabulate all your expenses. If you’re unsure, it may be a good idea to work with an accountant or at least professional tax preparation software.

Recommended: How to File Taxes for the First Time

Pros and Cons of Itemized Deductions

So what are the benefits and drawbacks of itemizing your deductions? Let’s take a look.

Pro: Itemizing could help lower your taxable income and save you more money than the standard deduction.
Con: Given changes to tax law a few years back, there’s a good chance you may save more with the standard deduction.
Pro: Because you’re writing off certain expenses and know which expenses are deductible, you may be more prudent with your spending habits throughout the year.
Con: Itemizing can involve a lot more paperwork and effort. It can be confusing, and you must make sure you’re only itemizing deductions for which you actually qualify to avoid trouble with the IRS.

The Takeaway

Most people will likely save more money on their taxes with the standard deduction, but depending on your scenario, you could see a greater reduction in your tax liability by itemizing. If you have the time, it may be worth it to go through the process of itemizing, just to see if you could save money. If you can, great! And if not, the standard deduction also offers great savings.

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FAQ

Can anyone itemize a deduction?

All taxpayers are permitted to itemize deductions, but the Tax Cuts and Jobs Act has made it less attractive to itemize for many Americans. Why? The standard deduction essentially doubled in size, while fewer expenses became eligible for itemizing.

Still, it may be worth calculating your itemized deductions to see if you can save more than you would with the standard deduction.

What are some things that you cannot itemize?

Since the Tax Cuts and Jobs Act, there are fewer things that you can itemize on your tax return. Even some popular deductions that people used to take are no longer eligible, including moving expenses, tax preparation fees, and unreimbursed business expenses.

Many deductions have a lot of fine print — both for inclusion and exclusion — so it’s a good idea to work with an accountant or professional tax preparation software to determine what counts as an itemized deduction.

Do you need proof for itemized deductions?

Generally, you should have proof for expenses that you are claiming as an itemized deduction. Such documentation would prove that you paid the expenses and that they were eligible for the deduction. The IRS calls this the burden of proof.

Photo credit: iStock/Milan_Jovic
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Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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2025
Apply for a Credit Card and Get Approved: Step-By-Step Guide

Apply for a Credit Card: Step-By-Step Guide

By | Credit, credit card, Family Finances | Comments Off on Apply for a Credit Card: Step-By-Step Guide

Applying for a credit card is an important step in many people’s financial lives. It typically involves three steps: gathering your information, filling out your application, and waiting for approval and the potential impact on your credit score.

Here’s the lowdown on the key things to know to apply for a credit card — and most importantly, to get approved for a credit card.

Key Points

•   Typically, applying for a credit card requires three steps: gathering information, filling out forms, and handling any credit impact.

•   Gather necessary information before applying, including income, address, employment status, and financial details.

•   Understand credit card terms like balance, APR, and fees to make informed decisions.

•   Check credit score to assess approval chances and creditworthiness.

•   Applying for a card can temporarily lower a credit score due to a hard inquiry.

What to Consider When Applying for a Credit Card

Before you worry about how to get a credit card, it’s helpful to first understand what a credit card is. As the first word in its name suggests, a credit card is a line of credit, which is a type of flexible loan that enables you to borrow money up to a fixed limit.

When an individual charges a transaction at a business that accepts credit card payments, the credit card company pays the merchant. The cardholder must then pay back the credit card company by a designated date. Otherwise, they’ll incur interest charges.

This basic premise of how credit cards work means the card company is taking a risk when extending credit to any individual. They assess that risk via an application that determines not only whether the individual gets approved for a credit card, but also factors like their credit card limit and annual percentage rate (APR) on a credit card.

Before applying, there are some important considerations that can help improve your chances of getting approved for a credit card.

Recommended: Tips for Using a Credit Card Responsibly

Learn About the Terms Associated with Your Credit Card

Evaluating different types of credit cards can feel overwhelming for a newbie, so it’s a good idea to get familiar with some basic credit card terms that are common across all credit cards. Here are some common terms you might run into in a credit card application and as you begin to use your new card:

•   Balance: Your balance is the amount of money you owe on your credit card. This can include purchases (even paying taxes with credit card) as well as any fees, balance transfers, and cash advances.

•   Balance transfer: A balance transfer is when you move money from one credit card to another credit card, ideally one with a lower APR. This can allow you to pay off your debt more easily, though you’ll often pay a balance transfer fee to move over the balance.

•   Billing cycle: A credit card billing cycle is the period of time between the regular statements you receive from your credit card company. Usually, billing cycles occur on a monthly basis.

•   CVV: The card verification value, or CVV number on a credit card, is a three- to four-digit number that appears on a physical credit card. It serves as an additional layer of security in transactions that occur over the phone or online.

•   Expiration date: A credit card expiration date represents when a credit card is valid until. Usually shown as a month and a year, you can use your credit card up until the last date of that month in that year.

•   Late fee: The late fee is a charge you’ll incur if you miss making at least your minimum payment by your payment due date. To avoid this fee, it’s important to always pay on time, even if you’re in the midst of disputing a credit card charge, for instance.

•   Minimum payment: The credit card minimum payment is the least amount you must pay each month on your outstanding balance. This can be a flat amount or a percentage of your outstanding balance.

•   Purchase APR: The APR for purchases represents the total annual cost of borrowing money through purchases made with your credit card. This APR applies only on remaining balances after the statement due date.

Decide on the Type of Credit Card You Need

There are a number of different types of credit cards out there that can serve different needs. For instance, there are:

•   Travel rewards credit cards

•   Cash back credit cards

•   Credit builder credit cards

•   Balance transfer credit cards

While most of the above types of cards are unsecured credit cards, meaning no deposit is required, there are also secured credit cards. These do require a deposit, though they may also be more accessible to those with limited or low credit.

Different types of cards offer different benefits, and they may also vary when it comes to things like annual fees or average credit card limits. Some programs, like SoFi Plus, provide additional perks and rewards, making it worthwhile to explore all available options before choosing a card.

There may also be differences in the requirements for getting approved. It’s not so much a question of how old you have to be to get a credit card — rather, cards may have varying requirements for minimum income or credit score needed to qualify.

Before applying, it’s a good idea to do some comparison shopping to find a card that not only fits your needs but also that you’re eligible for.

Check Your Credit Score

Your credit score is a number that indicates the likelihood that you’ll repay a debt. It’s based on your credit history, and banks use it as a tool for evaluating credit card applications and deciding whether to approve them.

Here are some common factors that can affect your credit score:

•   Payment history, including on-time payments, missed payments, and having an account sent to collections

•   Credit utilization, or how much one owes relative to their total available revolving credit

•   Length of credit history

•   Types of credit accounts

•   Recent activity, such as applying for or opening new accounts

Generally, the higher an individual’s credit score, the more creditworthy they’re considered. If using the FICO® scoring model, here’s a general breakdown of what various scores mean:

•   300-580: Poor

•   580-669: Fair

•   670-739: Good

•   740-799: Very good

•   800-850: Exceptional

It’s a good idea for an individual to know their score and their chances of getting approved before applying for a credit card. The minimum credit score for a credit card will vary depending on the type of card it is.

For example, rewards credit cards, which come with big perks, tend to require at least a good credit score. But some types of credit cards, such as secured credit cards, may be more accessible to those with lower credit scores because they pose a lesser risk to lenders. This can make the latter category more appealing if, for instance, you’re getting your first credit card.

It’s worth noting that pulling one’s own credit information is considered a “soft inquiry” and does not negatively impact their credit score. When you apply for a new credit card, however, it will generate a “hard inquiry,” which can lower your credit score temporarily.

Where to Apply for a Credit Card

Credit cards are offered through banks, credit unions, retailers, airlines, colleges and universities, and a host of other institutions. This means that there are a variety of places where one can apply for a credit card — and often a number of ways to apply.

You can apply for a credit card in person, such as at a bank branch or retail location. Or, you may apply over the phone. Most credit card issuers also offer online applications, which add convenience to the process.

How to Apply for a Credit Card in 3 Steps

Ideally, by the time you sit down to actually apply for a credit card, you’ll have done the necessary homework to determine if you should get a credit card. This includes checking your credit score and potentially getting preapproved (though more on that later).

1. Gather the Necessary Information

The application process will be easier — and likely quicker — if you’re prepared. This means gathering any necessary documentation (more on what you’ll usually need in the next section) and having relevant information on hand, such as your income and Social Security number.

2. Fill Out and Submit an Application

Next, it’s time to fill out the application. There are a few ways you can do this: online, over the phone, or through the mail. It’s generally quickest to complete an application online.

You’ll need to fill in the requested fields and upload (or make copies of) any necessary documents. Once you submit your application, you should hear back within a few weeks at the most — sometimes, you’ll hear back almost the same day.

3. Be Ready for the Credit Impact and Repayment

As you wait for your credit card to arrive in the mail, you should take stock of the recent hit you took to your credit from the hard inquiry (typically, this will lower your score by several points for a brief period of time). It’s generally advised to avoid applying for multiple credit cards or loans within a short period of time to minimize the credit impact.

Also start to consider your strategy for how you’ll repay your credit card balance once you start swiping. Consider setting up automatic payments from your bank account each month to make sure you’re not late, or you might set a reminder on your phone or in your calendar.

What Do You Need to Apply for a Credit Card?

While application requirements will depend on the credit card issuer, what you need to apply for a credit card generally includes:

•   Annual income

•   Address and length of time at that address

•   Date of birth

•   Phone number

•   Social Security number

•   Employment status and sources of income

•   Financial accounts and/or assets

•   Financial liabilities

•   Country of citizenship and residence

Credit Card Preapproval and Prequalification

Getting prequalified or preapproved for a credit card means you’ve been prescreened for a credit card and meet at least some of the eligibility requirements. The two terms can be used interchangeably, though preapproval might carry slightly more weight in terms of your odds of eventual approval.

You’ll still need to go through the formal application to get approved for a credit card though, as neither preapproval or prequalification means you’ve been approved. The formal application process will involve a hard inquiry, whereas prequalification and preapproval generally only involve soft inquiries.

Still, preapproval or prequalification can be a good way to suss out potential credit card options and likelihood of getting approved before you move forward with an application and risk the impact to your credit.

What Happens If Your Application Is Turned Down?

Getting turned down for a credit card is indeed disappointing. When a credit card application is declined, you have the right to know why. You can request details about your application in the form of an adverse action letter, which includes the reason for the denial, details about your credit score, and notice of the right to dispute the accuracy of information provided by the credit reporting agency.

This can serve as helpful context for understanding why an application was declined. It can also help in determining what the appropriate next steps are for improving one’s chances of approval, if and when you apply for another credit card. For instance, you may consider applying for a credit card that has less stringent credit requirements, or you may take steps to build your credit score and try again at a later date.

Secured and Prepaid Credit Cards

If you were turned down for a credit card, you might take some steps to build your credit before trying again, or you might consider other options. Two alternatives you might look into are secured credit cards and prepaid credit cards.

With a secured credit card, you put down a deposit, which serves as collateral and usually acts as the card’s credit limit. Because there’s collateral there for the credit card issuer to fall back on if you fail to make your payments, secured credit cards are generally easier to get approved to than the more traditional, secured credit cards.

Prepaid debit cards don’t help you build your credit, as you’re not actually borrowing funds. Rather, you load the card with funds that you can then use in person or online. This can offer some of the convenience that a credit card offers over cash, without the application and approval process.

The Takeaway

Applying for a credit card can be a simple three-step process of gathering the required details, submitting an application, and handling the likely credit impact. You will probably have many options when selecting a card, so take your time to find the right fit.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How do I choose a credit card?

Choosing a credit card is a personal decision that depends on your needs, preferences, financial habits, and eligibility. Before applying for a credit card that appears to fit your needs, it’s a good idea to check your credit score and any other requirements, such as minimum income, to improve your chances of getting approved.

How long does it take to get a credit card?

The length of time it takes to get a credit card can depend on a number of factors, including the eligibility requirements and how an application is submitted. Some online credit card applications offer fast or even instant approval, although it can take some additional time for the credit card to arrive in the mail.

Does your credit get pulled when applying for a credit card?

Generally, a credit card company will do a hard credit inquiry before extending final approval. However, there may be some scenarios where a credit card issuer may only do a soft inquiry, such as if an individual has been preapproved for a credit card or already has a banking relationship with the credit card issuer.

What are the requirements needed to get a credit card?

The requirements to get a credit card will typically vary from card to card. However, you’ll generally need to provide information on your annual income, your employment status, and your current debt obligations. Your creditworthiness also comes into play, though credit score requirements will differ depending on the card.

Can you get a credit card with no credit history?

It is possible to get a credit card with no credit history, though your options may be more limited. You may have an easier time getting approved for a secured credit card or a basic, no-frills credit card.

Photo credit: iStock/Dome Studio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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